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Apple Inc. Stock Ratio Analysis

What do the fundamentals tell us about Apple’s future?

Many headlines about Apple (NASDAQ:AAPL) focus solely on iPhone sales, Apple Watch sales, or rumors about upcoming products. Amid all that noise, investors shouldn't lose sight of what matters the most: the fundamentals. Let's see what Apple's key numbers tell us about the stock's future.

Source: Pixabay.

The key numbersTo understand what makes Apple stock tick, we should check a few key figures: operating margins, sales growth, earnings growth, and its dividend yield.

Operating margin

30%

Sales growth (past 5 years)

250%

Net income growth (past 5 years)

263%

Dividend yield

1.5%

Payout ratio

25%

Source: Yahoo Finance, April 21.

In addition to those solid numbers, Apple still trades with a P/E ratio of 17. That makes it significantly cheaper than the S&P 500 and the NASDAQ 100, which trade at 21 and 23 times earnings, respectively.

Apple's dividend yield of 1.5% is slightly lower than the S&P 500's average yield of 1.9%. However, that's still a decent yield for a stock that has already rallied 70% over the past 12 months. During that period, the S&P 500 only rose 13% as the NASDAQ gained 23%.

Massive marginsIn addition to being a fairly cheap stock, Apple's margins are tough to match. If we compare its operating margins to direct hardware rivals like Hewlett-Packard(NYSE:HPQ) and BlackBerry (NYSE:BB), Apple easily comes out on top.

Apple's margins shouldn't be directly compared to Samsung's (NASDAQOTH:SSNLF), since the latter also manufactures other consumer electronics, appliances, semiconductors, and other products. However, investors should compare the gross margins of their flagship mobile devices.

Last year, an IHS teardown revealed that the 16GB iPhone 6, which costs $649, cost just $200 to manufacture. By comparison, the 32GB Galaxy S5, which originally cost $650, had a BOM of $256. Credit Suisse estimates that after development, marketing, shipping, and other expenses are added, the 16GB iPhone 6 costs $350.60 to produce, and Apple receives $599 of its $649 retail price. That gives the iPhone 6 a gross profit margin of 41.5%.

However, that growth has a glaring weakness -- its top-heavy dependence on iPhones, which accounted for 69% of its top line last quarter. During the quarter, Apple's iPhone revenue rose 57% year-over-year as shipments climbed 46% to 74.5 million units. If that growth eventually slips due to rising competition, Apple's stock could take a massive hit.

Apple is trying to diversify its top line with new products like the Apple Watch. But even if the device hits analyst expectations of around 20 million shipments in 2015, it would merely account for single-digit percentages of its annual revenue. Meanwhile, robust Mac sales, which accounted for 9% of Apple's top line last quarter, might offset weak sales of iPads, which plummeted 22% year-over-year.

Dividend growth and buybacksOver the past 12 months, Apple has spent $11.2 billion on dividends and $44.3 billion on stock buybacks. Apple had a free cash flow of $59.7 billion during that period.

Investors should remember that Apple partially finances those dividends and buybacks by issuing debt. It does so to avoid being slapped by a big tax bill for repatriating its overseas cash, which stood at a whopping $158 billion (89% of all its cash and short term investments) at the end of the first quarter.

Apple reintroduced its dividend in 2012. As for buybacks, Apple faces a lot of pressure, particularly from activist investor Carl Icahn, to buy back more shares.

Bigger dividend boosts would encourage more investors to view Apple as a long-term investments instead of a short-term trading yo-yo, while additional buybacks will boost its earnings.

The key takeawaysApple stock is cheap, its top and bottom line growth remain healthy, and the company will likely boost dividends and buybacks in the near future. Apple's overwhelming dependence on the iPhone is its Achilles' heel, but it will likely sidestep the commoditization of the smartphone market by carefully building its reputation as a luxury brand.

Leo Sun owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Author

Leo is a Tech and Consumer Goods Specialist who has covered the crossroads of Wall Street and Silicon Valley since 2012. His wheelhouse includes cloud, IoT, analytics, telecom, and gaming related businesses. Follow him on Twitter for more updates!